Amazon rallies as investors celebrate profits

NEW YORK (AFP) - Amazon shares shot to record levels Friday after a blowout earnings report seen as a potential watershed for the US online giant.

Amazon leapt as much as 17 per cent, before closing with a 9.8 per cent gain at US$529.42 a day after reporting a surprise profit, which fuelled hopes that the company's strategy of big investments is finally paying off.

"After questioning the investment rationale for years, Amazon is seeing the fruits of its labours in both revenue growth and operating margin," said Deutsche Bank analyst Ross Sandler in a note to clients.

"Few mega-cap consumer Internet companies can sustainably demonstrate accelerating revenue and margin expansion at the same time, and when it happens, it's a magical trend that rightfully gets rewarded."

Amazon's shares have doubled since hitting lows last October on pessimism over its profit outlook, and Friday's surge put its market capitalisation at nearly US$250 billion (S$343 billion), overtaking the brick-and-mortar retail leader Wal-Mart.

The US e-commerce giant, which is also a major player in online video and cloud computing, on Thursday reported a net profit of US$92 million while revenues jumped 20 per cent from a year ago to US$23.18 billion.

MORE POTENTIAL?

The company founded by Jeff Bezos 20 years ago has been known for investing in long-term projects with little concern for short-term profits, but some of those investments now appear to be paying off.

"We believe that Amazon is now starting to move away from the heavy build years for its e-commerce business just as its top line accelerates, yielding the beginnings of the much sought-after margin leverage," said a note from Cantor Fitzgerald's Youssef Squali.

Amazon has in the past drawn scepticism from investors as it expanded with new offerings, including its own Kindle tablets and phones, an online video streaming service, grocery delivery and its latest gadget, a virtual voice-activated personal assistant.

Brian Pitz, analyst at Jefferies, said he remained bullish on Amazon, arguing that it has room to grow.

"We think Amazon's ability to get purchases to consumers fast is a huge differentiator which drives growth in existing and new categories," he said in a note to clients.

He added that Amazon's international operations "carry huge potential."

Amazon Web Services, the cloud computing division, was another big factor in the results, showing a revenue jump of more than 80 per cent to US$1.8 billion in the three months to June 30, and accounting for US$391 million in operating income.

North American sales, which are the largest segment for Amazon, rose 25 per cent to US$13.8 billion. Amazon also offered a better-than-expected outlook for the current quarter, predicting revenues in the range of US$23.3 billion to US$25.5 billion.

Forrester Research analyst Sucharita Mulpuru said that despite the latest results Amazon still shows "weak profitability."

"I'm not sure why this is cause for celebration by investors," she told AFP.

"It doesn't really change the narrative of Amazon as a break-even business."

The Straits Times

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